Secular stagnation & ‘faux capital’ (or why not all growth it equal)

Following a speech by Larry Summers (former US Treasury Secretary & advisor to Presidents Clinton & Obama), economists around the world are debating something called ‘secular stagnation’, or whether developed economies have actually grown much in the past 30 years without the help of an increase in debt, and whether they now have the capacity to grow without debt (it’s a rather pessimistic view of the world!).

“Credit bubbles, the authors believe, caused western economies to run dangerously above their potential in the decades leading up to the current crisis creating an impossible stock of “goodies”, which could not be shifted or consumed by western economies without crashing the underlying markets….The result: the creation of faux capital which has never been unwound.

“As productivity per capita rises, so does the economy’s potential. Policy should consequently not attempt to direct capital to pointless endeavours that produce goods, services and assets that the economy has no capacity to consume and is not prepared to fight over. That sort of action only leads to an overhang of [faux] capital that later disrupts the system.“

Put simply, counties like the UK aren’t stagnating, we’ve just directed too much of our investment and energy in unproductive ventures (think housing bubbles in the US, UK, Spain and Ireland) and too little on genuine, productive economic activity.

Or in other words: Not all growth is equal.

Share This Article

About This Blog

This is an informal blog written by ADS staff.

While it is written from an ADS perspective, contributions should not be taken as formal statements of ADS policy, unless stated otherwise.